Fair value measurements

a) Fair value hierarchy

Fair value of financial assets and financial liabilities is estimated based on the framework established in the fair value accounting guidance. The guidance defines fair value as the price to sell an asset or transfer a liability in an orderly transaction between market participants and establishes a three-level valuation hierarchy in which inputs into valuation techniques used to measure fair value are classified. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data.

The three levels of the hierarchy are as follows:


•	Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets;


•	Level 2 – Includes, among other items, inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves, quoted prices for similar assets and liabilities in active markets, and quoted prices for identical or similar assets and liabilities in markets that are not active; and


•	Level 3 – Inputs that are unobservable and reflect management’s judgments about assumptions that market participants would use in pricing an asset or liability.

We categorize financial instruments within the valuation hierarchy at the balance sheet date based upon the lowest level of inputs that are significant to the fair value measurement. Accordingly, transfers between levels within the valuation hierarchy occur when there are significant changes to the inputs, such as increases or decreases in market activity, changes to the availability of current prices, changes to the transparency to underlying inputs, and whether there are significant variances in quoted prices. Transfers in and/or out of any level are assumed to occur at the end of the period.

We use one or more pricing services to obtain fair value measurements for the majority of the investment securities we hold. Based on management’s understanding of the methodologies used, these pricing services only produce an estimate of fair value if there is observable market information that would allow them to make a fair value estimate. Based on our understanding of the market inputs used by the pricing services, all applicable investments have been valued in accordance with GAAP. We do not typically adjust prices obtained from pricing services. The following is a description of the valuation techniques and inputs used to determine fair values for financial instruments carried at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy.

Fixed maturities

We use pricing services to estimate fair value measurements for the majority of our fixed maturities. The pricing services use market quotations for fixed maturities that have quoted prices in active markets; such securities are classified within Level 1. For fixed maturities other than U.S. Treasury securities that generally do not trade on a daily basis, the pricing services prepare estimates of fair value measurements using their pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Additional valuation factors that can be taken into account are nominal spreads, dollar basis, and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news. The market inputs used in the pricing evaluation, listed in the approximate order of priority include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each input is dependent on the asset class and the market conditions. Given the asset class, the priority of the use of inputs may change or some market inputs may not be relevant. Additionally, the valuation of fixed maturity investments is more subjective when markets are less liquid due to the lack of market based inputs (i.e., stale pricing), which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur. The overwhelming majority of fixed maturities are classified within Level 2 because the most significant inputs used in the pricing techniques are observable. For a small number of fixed maturities, we obtain a quote from a broker (typically a market maker). Due to the disclaimers on the quotes that indicate that the price is indicative only, we include these fair value estimates in Level 3.

Equity securities

Equity securities with active markets are classified within Level 1 as fair values are based on quoted market prices. For non-public equity securities, fair values are based on market valuations and are classified within Level 2. Equity securities for which pricing is unobservable are classified within Level 3.

Short-term investments

Short-term investments, which comprise securities due to mature within one year of the date of purchase that are traded in active markets, are classified within Level 1 as fair values are based on quoted market prices. Securities such as commercial paper and discount notes are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value.

Other investments

Fair values for the majority of Other investments including investments in partially-owned investment companies, investment funds, and limited partnerships are based on their respective net asset values or equivalent (NAV). The majority of these investments, for which NAV was used as a practical expedient to measure fair value, are classified within Level 3 because either ACE will never have the contractual option to redeem the investments or will not have the contractual option to redeem the investments in the near term. The remainder of such investments is classified within Level 2. Certain of our long duration contracts have assets that do not qualify for separate account reporting under GAAP. These assets comprise mutual funds classified within Level 1 in the valuation hierarchy on the same basis as other equity securities traded in active markets. Other investments also includes equity securities and fixed maturities held in rabbi trusts maintained by ACE for deferred compensation plans, which are classified within the valuation hierarchy on the same basis as other equity securities and fixed maturities.

Securities lending collateral

The underlying assets included in Securities lending collateral in the consolidated balance sheets are fixed maturities which are classified in the valuation hierarchy on the same basis as other fixed maturities. Excluded from the valuation hierarchy is the corresponding liability related to ACE’s obligation to return the collateral plus interest as it is reported at contract value and not fair value on the consolidated balance sheets.

Investment derivative instruments

Actively traded investment derivative instruments, including futures, options, and exchange-traded forward contracts are classified within Level 1 as fair values are based on quoted market prices. The fair value of cross-currency swaps are based on market valuations and are classified within Level 2. Investment derivative instruments are recorded in Accounts payable, accrued expenses, and other liabilities in the consolidated balance sheets.

Other derivative instruments

We maintain positions in other derivative instruments including exchange-traded equity futures contracts and option contracts designed to limit exposure to a severe equity market decline, which would cause an increase in expected claims and, therefore, reserves for our guaranteed minimum death benefits (GMDB) and guaranteed living benefits (GLB) reinsurance business. Our position in exchange-traded equity futures contracts is classified within Level 1. The fair value of the majority of the remaining positions in other derivative instruments is based on significant observable inputs including equity security and interest rate indices. Accordingly, these are classified within Level 2. Our position in credit default swaps is typically included within Level 3. Other derivative instruments are recorded in Accounts payable, accrued expenses, and other liabilities in the consolidated balance sheets.

Separate account assets

Separate account assets represent segregated funds where investment risks are borne by the customers, except to the extent of certain guarantees made by ACE. Separate account assets comprise mutual funds classified in the valuation hierarchy on the same basis as other equity securities traded in active markets and are classified within Level 1. Separate account assets also include fixed maturities classified within Level 2 because the most significant inputs used in the pricing techniques are observable. Excluded from the valuation hierarchy are the corresponding liabilities as they are reported at contract value and not fair value in the consolidated balance sheets. Separate account assets are recorded in Other assets in the consolidated balance sheets.

Guaranteed living benefits

The GLB arises from life reinsurance programs covering living benefit guarantees whereby we assume the risk of guaranteed minimum income benefits (GMIB) and guaranteed minimum accumulation benefits (GMAB) associated with variable annuity contracts. GLB’s are recorded in Accounts payable, accrued expenses, and other liabilities and Future policy benefits in the consolidated balance sheets. For GLB reinsurance, ACE estimates fair value using an internal valuation model which includes current market information and estimates of policyholder behavior. All of the treaties contain claim limits, which are factored into the valuation model. The fair value depends on a number of inputs, including changes in interest rates, changes in equity markets, credit risk, current account value, changes in market volatility, expected annuitization rates, changes in policyholder behavior, and changes in policyholder mortality.

The most significant policyholder behavior assumptions include lapse rates and the GMIB annuitization rates. Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodologies to determine rates applied to each treaty are comparable. The assumptions regarding lapse and GMIB annuitization rates determined for each treaty are based on a dynamic calculation that uses several underlying factors.

A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease. In general, the base lapse function assumes low lapse rates (ranging from about 1 percent to 6 percent per annum) during the surrender charge period of the GMIB contract, followed by a “spike” lapse rate (ranging from about 10 percent to 30 percent per annum) in the year immediately following the surrender charge period, and then reverting to an ultimate lapse rate (generally around 10 percent per annum), typically over a 2-year period. This base rate is adjusted downward for policies with more valuable guarantees (policies with guaranteed values far in excess of their account values) by multiplying the base lapse rate by a factor ranging from 15 percent to 75 percent. Additional lapses due to partial withdrawals and older policyholders with tax-qualified contracts (due to required minimum distributions) are also included.

The GMIB annuitization rate is the percentage of policies for which the policyholder will elect to annuitize using the guaranteed benefit provided under the GMIB. All else equal, as GMIB annuitization rates increase, ultimate claim payments will increase, subject to treaty claim limits. In general ACE assumes that GMIB annuitization rates will be higher for policies with more valuable guarantees (policies with guaranteed values far in excess of their account values). In addition, we also assume that GMIB annuitization rates are higher in the first year immediately following the waiting period (the first year the policies are eligible to annuitize using the GMIB) in comparison to all subsequent years. We do not yet have a robust set of annuitization experience because most of our clients’ policyholders are not yet eligible to annuitize using the GMIB. However, for certain clients representing approximately 36 percent of the total GMIB guaranteed value there are several years of annuitization experience. For these clients the annuitization function reflects the actual experience and has a maximum annuitization rate per annum of 8 percent (a higher maximum applies in the first year a policy is eligible to annuitize using the GMIB—it is over 13 percent). For most clients, there is not a credible amount of observable relevant behavior data and so we use a weighted-average (with a heavier weighting on the observed experience noted previously) of three different annuitization functions with maximum annuitization rates per annum of 8 percent, 12 percent, and 30 percent, respectively (with significantly higher rates in the first year a policy is eligible to annuitize using the GMIB). The GMIB reinsurance treaties include claim limits to protect ACE in the event that actual annuitization behavior is significantly higher than expected.

The effect of changes in key market factors on assumed lapse and annuitization rates reflect emerging trends using data available from cedants. For treaties with limited experience, rates are established in line with data received from other ceding companies adjusted, as appropriate, with industry estimates. The model and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based upon additional experience obtained related to policyholder behavior and availability of more information, such as market conditions, market participant assumptions, and demographics of in-force annuities. During the three and nine months ended September 30, 2012, no material changes were made to actuarial or behavioral assumptions. We made minor technical refinements to the model with a favorable net income impact of approximately $21 million for the three and nine months ended September 30, 2012.

We view the variable annuity reinsurance business as having a similar risk profile to that of catastrophe reinsurance, with the probability of a cumulative long-term economic net loss relatively small at the time of pricing. However, adverse changes in market factors and policyholder behavior will have an adverse impact on net income, which may be material. Because of the significant use of unobservable inputs including policyholder behavior, GLB reinsurance is classified within Level 3.

The following tables present, by valuation hierarchy, the financial instruments measured at fair value on a recurring basis:



	Level 1			Level 2		Level 3		Total
	(in millions of U.S. dollars)
September 30, 2012
Assets:
Fixed maturities available for sale
U.S. Treasury and agency	$	1,991		$	1,563	$	—	$	3,554
Foreign	204			13,738		25		13,967
Corporate securities	19			15,684		130		15,833
Mortgage-backed securities	—			10,707		29		10,736
States, municipalities, and political subdivisions	—			2,413		1		2,414
	2,214			44,105		185		46,504
Equity securities	761			5		4		770
Short-term investments	1,561			868		—		2,429
Other investments	248			195		2,178		2,621
Securities lending collateral	—			2,039		—		2,039
Investment derivative instruments	(3		)	—		—		(3		)
Other derivative instruments	6			32		—		38
Separate account assets	1,024			61		—		1,085
Total assets measured at fair value	$	5,811		$	47,305	$	2,367	$	55,483
Liabilities:
GLB⁽¹⁾	$	—		$	—	$	1,279	$	1,279

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⁽¹⁾	Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as Future policy benefits in the consolidated balance sheets. Refer to Note 5 for additional information.



	Level 1			Level 2		Level 3		Total
	(in millions of U.S. dollars)
December 31, 2011
Assets:
Fixed maturities available for sale
U.S. Treasury and agency	$	1,691		$	1,264	$	5	$	2,960
Foreign	212			12,156		33		12,401
Corporate securities	20			14,539		134		14,693
Mortgage-backed securities	—			10,173		28		10,201
States, municipalities, and political subdivisions	—			1,711		1		1,712
	1,923			39,843		201		41,967
Equity securities	632			2		13		647
Short-term investments	1,246			1,055		—		2,301
Other investments	208			229		1,877		2,314
Securities lending collateral	—			1,375		—		1,375
Investment derivative instruments	10			—		—		10
Other derivative instruments	(16		)	54		3		41
Separate account assets	607			53		—		660
Total assets measured at fair value	$	4,610		$	42,611	$	2,094	$	49,315
Liabilities:
GLB⁽¹⁾	$	—		$	—	$	1,319	$	1,319

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⁽¹⁾	Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as Future policy benefits in the consolidated balance sheets. Refer to Note 5 for additional information.

The transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2012 and 2011 were not material.

Fair value of alternative investments

Included in Other investments in the fair value hierarchy at September 30, 2012 and December 31, 2011 are investment funds, limited partnerships, and partially-owned investment companies measured at fair value using NAV as a practical expedient. At September 30, 2012 and December 31, 2011, there were no probable or pending sales related to any of the investments measured at fair value using NAV.

The following table presents, by investment category, the expected liquidation period, fair value, and maximum future funding commitments of alternative investments:



	Expected Liquidation Period	September 30, 2012				December 31, 2011
	Expected Liquidation Period	Fair Value		Maximum Future Funding Commitments		Fair Value		Maximum Future Funding Commitments
		(in millions of U.S. dollars)
Financial	5 to 9 Years	$	210	$	124	$	205	$	141
Real estate	3 to 9 Years	323		66		270		96
Distressed	6 to 9 Years	189		142		182		57
Mezzanine	6 to 9 Years	269		294		195		282
Traditional	3 to 8 Years	647		541		565		200
Vintage	1 to 3 Years	16		1		18		1
Investment funds	Not Applicable	389		—		378		—
		$	2,043	$	1,168	$	1,813	$	777

Included in all categories in the above table except for Investment funds are investments for which ACE will never have the contractual option to redeem but receives distributions based on the liquidation of the underlying assets. Included in the “Expected Liquidation Period” column above is the range in years over which ACE expects the majority of underlying assets in the respective categories to be liquidated. Further, for all categories except for Investment funds, ACE does not have the ability to sell or transfer the investments without the consent from the general partner of individual funds.

Financial

Financial consists of investments in private equity funds targeting financial services companies such as financial institutions and insurance services around the world.

Real estate

Real estate consists of investments in private equity funds targeting global distress opportunities, value added U.S. properties, and global mezzanine debt securities in the commercial real estate market.

Distressed

Distressed consists of investments in private equity funds targeting distressed debt/credit and equity opportunities in the U.S.

Mezzanine

Mezzanine consists of investments in private equity funds targeting private mezzanine debt of large-cap and mid-cap companies in the U.S. and worldwide.

Traditional

Traditional consists of investments in private equity funds employing traditional private equity investment strategies such as buyout and venture with different geographical focuses including Brazil, Asia, Europe, and the U.S.

Vintage

Vintage consists of investments in private equity funds made before 2002 and where the funds’ commitment periods had already expired.

Investment funds

ACE’s investment funds employ various investment strategies such as long/short equity and arbitrage/distressed. Included in this category are investments for which ACE has the option to redeem at agreed upon value as described in each investment fund’s subscription agreement. Depending on the terms of the various subscription agreements, investment fund investments may be redeemed monthly, quarterly, semi-annually, or annually. If ACE wishes to redeem an investment fund investment, it must first determine if the investment fund is still in a lock-up period (a time when ACE cannot redeem its investment so that the investment fund manager has time to build the portfolio). If the investment fund is no longer in its lock-up period, ACE must then notify the investment fund manager of its intention to redeem by the notification date prescribed by the subscription agreement. Subsequent to notification, the investment fund can redeem ACE’s investment within several months of the notification. Notice periods for redemption of the investment funds range between 5 and 120 days. ACE can redeem its investment funds without consent from the investment fund managers.

Level 3 financial instruments

The fair value of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) consist of various inputs and assumptions that management makes when determining the fair value. Management analyzes changes in fair value measurements classified within Level 3 by comparing pricing and returns of our investments to benchmarks, including month-over-month movements, investment credit spreads, interest rate movements, and credit quality of securities.

The following table presents the significant unobservable inputs used in the Level 3 liability valuations. Excluded from the table below are inputs used to fair value Level 3 assets which are based on single broker quotes or net asset value and contain no quantitative unobservable inputs developed by management.



(in millions of U.S. dollars)	Fair Value at September 30, 2012		Valuation Technique	Significant Unobservable Inputs	Ranges
GLB⁽¹⁾	$	1,279	Actuarial model	Lapse rate	1% - 30%
				Annuitization rate	0% - 50%

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⁽¹⁾	Discussion of the most significant inputs used in the fair value measurement of GLB and the sensitivity of those assumptions is included within Note 4 a) Guaranteed living benefits.

The following tables present a reconciliation of the beginning and ending balances of financial instruments measured at fair value using significant unobservable inputs (Level 3):



	Three Months Ended September 30, 2012
	Assets																							Liabilities
	Available-for-Sale Debt Securities														Equity securities			Other investments			Other derivative instruments			GLB⁽¹⁾
	U.S. Treasury and Agency			Foreign			Corporate securities			MBS			States, municipalities, and political subdivisions		Equity securities			Other investments			Other derivative instruments			GLB⁽¹⁾
				(in millions of U.S. dollars)
Balance-Beginning of Period	$	4		$	20		$	137		$	27		$	1	$	12		$	2,047		$	1		$	1,354
Transfers into Level 3	—			5			5			10			—		2			53			—			—
Transfers out of Level 3	(4		)	(6		)	(26		)	—			—		(10		)	—			—			—
Change in Net Unrealized Gains (Losses) included in OCI	—			—			3			—			—		(1		)	13			—			—
Net Realized Gains/Losses	—			—			—			—			—		—			—			—			(75		)
Purchases	—			6			11			—			—		1			121			—			—
Sales	—			—			—			(7		)	—		—			(5		)	—			—
Settlements	—			—			—			(1		)	—		—			(51		)	(1		)	—
Balance-End of Period	$	—		$	25		$	130		$	29		$	1	$	4		$	2,178		$	—		$	1,279
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	$	—		$	—		$	—		$	—		$	—	$	—		$	—		$	—		$	(75	)

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⁽¹⁾	Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as Future policy benefits in the consolidated balance sheets. Refer to Note 5 for additional information.



	Three Months Ended September 30, 2011
	Assets																			Liabilities
	Available-for-Sale Debt Securities											Equity securities		Other investments			Other derivative instruments			GLB⁽¹⁾
	Foreign			Corporate securities			MBS			States, municipalities, and political subdivisions		Equity securities		Other investments			Other derivative instruments			GLB⁽¹⁾
	(in millions of U.S. dollars)
Balance-Beginning of Period	$	27		$	142		$	34		$	1	$	10	$	1,680		$	4		$	524
Transfers into Level 3	—			—			—			—		—		—			—			—
Transfers out of Level 3	(11		)	—			(13		)	—		—		—			—			—
Change in Net Unrealized Gains (Losses) included in OCI	—			(6		)	—			—		—		59			—			—
Net Realized Gains/Losses	(1		)	—			—			—		—		(1		)	5			952
Purchases	1			1			—			—		—		85			—			—
Sales	—			(3		)	(2		)	—		—		—			—			—
Settlements	—			(9		)	(1		)	—		—		(58		)	(1		)	—
Balance-End of Period	$	16		$	125		$	18		$	1	$	10	$	1,765		$	8		$	1,476
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	$	—		$	—		$	—		$	—	$	—	$	(1	)	$	4		$	952

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⁽¹⁾

Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as Future policy benefits in the consolidated balance sheets. The liability for GLB reinsurance was $1,635 million at September 30, 2011, and $676 million at June 30, 2011, which includes a fair value derivative adjustment of $1,476 million and $524 million, respectively.



	Nine Months Ended September 30, 2012
	Assets																								Liabilities
	Available-for-Sale Debt Securities															Equity securities			Other investments			Other derivative instruments			GLB⁽¹⁾
	U.S. Treasury and Agency			Foreign			Corporate securities			MBS			States, municipalities, and political subdivisions			Equity securities			Other investments			Other derivative instruments			GLB⁽¹⁾
				(in millions of U.S. dollars)
Balance-Beginning of Period	$	5		$	33		$	134		$	28		$	1		$	13		$	1,877		$	3		$	1,319
Transfers into Level 3	—			6			33			22			1			2			53			—			—
Transfers out of Level 3	(4		)	(7		)	(35		)	(15		)	—			(10		)	—			—			—
Change in Net Unrealized Gains (Losses) included in OCI	—			—			6			—			—			—			37			—			—
Net Realized Gains/Losses	—			—			(1		)	—			—			—			(7		)	(4		)	(40		)
Purchases	—			46			19			4			—			4			366			3			—
Sales	—			(52		)	(15		)	(7		)	—			(5		)	(6		)	—			—
Settlements	(1		)	(1		)	(11		)	(3		)	(1		)	—			(142		)	(2		)	—
Balance-End of Period	$	—		$	25		$	130		$	29		$	1		$	4		$	2,178		$	—		$	1,279
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	$	—		$	—		$	—		$	—		$	—		$	—		$	(7	)	$	—		$	(40	)

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⁽¹⁾	Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as Future policy benefits in the consolidated balance sheets. Refer to Note 5 for additional information.



	Nine Months Ended September 30, 2011
	Assets																					Liabilities
	Available-for-Sale Debt Securities												Equity securities			Other investments			Other derivative instruments			GLB⁽¹⁾
	Foreign			Corporate securities			MBS			States, municipalities, and political subdivisions			Equity securities			Other investments			Other derivative instruments			GLB⁽¹⁾
	(in millions of U.S. dollars)
Balance-Beginning of Period	$	26		$	115		$	39		$	2		$	13		$	1,432		$	4		$	507
Transfers into Level 3	9			34			4			—			—			—			—			—
Transfers out of Level 3	(18		)	(4		)	(48		)	—			—			—			—			—
Change in Net Unrealized Gains (Losses) included in OCI	(1		)	(5		)	—			—			(1		)	110			—			—
Net Realized Gains/Losses	—			(2		)	—			—			4			(4		)	6			969
Purchases	6			23			46			—			2			418			—			—
Sales	(3		)	(23		)	(17		)	—			(8		)	(55		)	—			—
Settlements	(3		)	(13		)	(6		)	(1		)	—			(136		)	(2		)	—
Balance-End of Period	$	16		$	125		$	18		$	1		$	10		$	1,765		$	8		$	1,476
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	$	—		$	—		$	—		$	—		$	—		$	(4	)	$	4		$	969

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⁽¹⁾

Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as Future policy benefits in the consolidated balance sheets. The liability for GLB reinsurance was $1,635 million at September 30, 2011, and $648 million at December 31, 2010, which includes a fair value derivative adjustment of $1,476 million and $507 million, respectively.

b) Financial instruments disclosed, but not measured, at fair value

ACE uses various financial instruments in the normal course of its business. Our insurance contracts are excluded from fair value of financial instruments accounting guidance, and therefore, are not included in the amounts discussed below.

The carrying values of cash, other assets, other liabilities, and other financial instruments not included below approximated their fair values.

Investments in partially-owned insurance companies

Fair values for investments in partially-owned insurance companies are based on ACE’s share of the net assets based on the financial statements provided by those companies.

Short- and long-term debt and trust preferred securities

Where practical, fair values for short-term debt, long-term debt, and trust preferred securities are estimated using discounted cash flow calculations based principally on observable inputs including incremental borrowing rates, which reflect ACE’s credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued.

The following table presents carrying values and fair values of financial instruments not measured at fair value:



	September 30, 2012				December 31, 2011
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:	(in millions of U.S. dollars)
Fixed maturities held to maturity
U.S. Treasury and agency	$	1,084	$	1,129	$	1,078	$	1,126
Foreign	919		970		935		930
Corporate securities	2,182		2,322		2,338		2,337
Mortgage-backed securities	2,222		2,330		2,949		3,036
States, municipalities, and political subdivisions	1,086		1,128		1,147		1,176
	7,493		7,879		8,447		8,605
Partially-owned insurance companies	354		354		352		352
Total assets	$	7,847	$	8,233	$	8,799	$	8,957
Liabilities:
Short-term debt	$	1,402	$	1,402	$	1,251	$	1,251
Long-term debt	3,360		3,964		3,360		3,823
Trust preferred securities	309		459		309		404
Total liabilities	$	5,071	$	5,825	$	4,920	$	5,478

The following table presents, by valuation hierarchy, the financial instruments not measured at fair value:



	Level 1		Level 2		Level 3		Total
September 30, 2012	(in millions of U.S. dollars)
Assets:
Fixed maturities held to maturity
U.S. Treasury and agency	$	615	$	514	$	—	$	1,129
Foreign	—		970		—		970
Corporate securities	—		2,306		16		2,322
Mortgage-backed securities	—		2,330		—		2,330
States, municipalities, and political subdivisions	—		1,128		—		1,128
	615		7,248		16		7,879
Partially-owned insurance companies	—		—		354		354
Total assets	$	615	$	7,248	$	370	$	8,233
Liabilities:
Short-term debt	$	—	$	1,402	$	—	$	1,402
Long-term debt	—		3,964		—		3,964
Trust preferred securities	—		459		—		459
Total liabilities	$	—	$	5,825	$	—	$	5,825